UK hydrogen strategy – a summary of key policy proposals

Ricardo is supporting organisations around the world with the adoption and application of hydrogen as a critical fuel to enable the realisation of a low carbon future. On the 17 August, the UK Government published the UK hydrogen strategy. Ricardo’s Colin McNaught reviews the key policy proposals and how they match the ambition for hydrogen?

Why hydrogen?

Hydrogen has had champions over the years who have pointed out its many benefits including flexibility, energy density, and suitability for storage. This has sometimes led to hydrogen being captioned as the “Fuel of the Future”, used for 100% of energy demand in a “Hydrogen Economy”. In the past the riposte from sceptics has been that hydrogen’s role will always be in the future.

So why is hydrogen now much more prominent in the energy news?

The simple answer is that the need to limit global average temperature rise to 1.5 degrees Celsius forces more aggressive decarbonisation. This has drawn in sectors such as marine and aviation – sectors which are hard to decarbonise through electrification.

So, while the physics, chemistry, and engineering challenges of hydrogen have not changed, the context for its use has.

A useful example is shipping – a large vessel may carry thousands of tonnes of fuel oil. Because the energy density (kWh/kg) of a battery system is typically 24 times lower, a Panamax cargo vessel (a mid-range container vessel) with 5,000 tonnes of fuel oil would need to carry 120,000 tonnes of batteries – more than twice the mass of the cargo carried. While future vessels will be more efficient, hydrogen and hydrogen carriers, such as ammonia, can address this issue for shipping.

Ricardo have been involved with the development and demonstration of hydrogen technology for many years such as:

• Fuel cell policy / feasibility e.g. for heavy duty vehicles including buses
• Hydrogen & ammonia production and use for shipping
• Hydrogen for aviation
• Hydrogen for internal combustion engines (heavy duty vehicles and rail)

The UK’s hydrogen strategy is a hugely positive step forward, as the Government commitment provides clarity that is important in itself, and as a mechanism for stimulating investment from the private sector. Indeed, the strategy will provide further stimulus for us to work with our clients in development and implementation of hydrogen technologies.

In the remainder of this blog, I will touch on three elements of the UK hydrogen strategy, where the new initiatives will play a key part in the development of the hydrogen industry within the UK:

Hydrogen Business Model (HBM)

A Catch 22 has been the largest barrier to hydrogen: the fuel has been expensive – so potential users have been deterred from buying the hydrogen and the vehicles, boilers etc. to use hydrogen. The HBM is designed to addresses the supply and demand sides of this barrier.

The HBM will provide a long-term revenue support contract to producers of low carbon hydrogen (see definition of low carbon later on). BEIS prefer a Contract for Difference (CfD) model, the same successful model used to accelerate the UK’s offshore wind electricity production. The key features are:

• Winners will secure a contract that pays the difference between their cost of production (Strike Price) and an energy market reference price.
• BEIS assessed seven options for setting the reference price, three options are flagged:
  1. Initial option: use of an “achieved sales price”, the difference between the actual price of hydrogen sold and the strike price.
  2. Longer term option: development of “market benchmark price”, based on volumes and prices for hydrogen.
  3. Price floor: use of natural gas price, as this is a fuel that many users would be switching from. For example, the industrial heat or power generation.
• A volume support mechanism is also proposed, to cover cases where producers do not sell enough low carbon hydrogen to cover their production costs, with a preference for a sliding scale with higher payments for initial production volumes.
• The consultation calls for views on the contract duration, citing the 15-year electricity CfD as an example.

The HBM will help to reduce the risk for producers of low carbon hydrogen and as a result help to accelerate investment in the market.

Net Zero Hydrogen Fund (NZHF)

This capital grant scheme has been flagged extensively in advance – as a £240 million grant programme for hydrogen production. We now have the details, which include the following:

• The aim is to de-risk Final Investment Decisions on low carbon hydrogen production – mainly though capital co-funding.
• The fund will also support front-end engineering design studies.
• The NZHF will support several production technologies, including CCUS-enabled and electrolytic hydrogen, aiming to support low carbon hydrogen projects that can deploy during the 2020s.
• Projects may receive HBM revenue support and NZHF capital support, for example large industrial CCUS cluster projects.
• BEIS also expect smaller, electrolytic, projects to combine NZHF grants and income from the Renewable Transport Fuel Obligation.

The proposed practical details for the NZHF include:

• Projects must prove they have a hydrogen off-taker and private sector financial backing.
• Projects will need to take their Final Investment Decision by 2025 or earlier.
• Projects will need to demonstrate economic growth and support for high skilled jobs.
• Bidding will open early in 2022 with a series of competitions envisaged.

The NZHF is an important initiative to provide Government support to the development of different technologies for hydrogen production. Not all will work, but this kind of Government support is essential for the evaluation of a range of potential technology options.

Low carbon hydrogen standard

Naturally we need a definition for low carbon hydrogen so that the new support measures covered above can be directed to projects that tackle climate change.

To do this the strategy introduces the UK’s proposals for a low carbon hydrogen standard. This is based on a Life Cycle Assessment (LCA) approach so that the carbon emissions at different stages of hydrogen production are included. The Government is minded that this covers hydrogen production (including raw materials acquisition, upstream emissions, and hydrogen production) but is asking for views on inclusion of embodied emissions (such as construction and decommissioning emissions). Ricardo’s extensive LCA work has demonstrated how critical this approach is: the carbon emissions (and wider environmental impacts) from the supply chain are often much more significant than the emissions from the production process itself.

An example threshold of around 15-20 gCO2e/MJ LHV is used to highlight that for this illustration three production methods would have higher emissions:

• Grid electrolysis (up until around 2030).
• Fossil gas routes (unless CO₂ capture is higher than 85%).
• Chlor-alkali processes (up until around 2030).

Ricardo’s experience in supporting incentive programmes shows that there is a need for an audit process – as used for the RO, FIT, RHI etc. Using Life Cycle Assessment is the right approach, but without an audit process it could lead to carbon emissions creeping in within the production cycle. The consultation paper includes three different audit options and three different options for the entity to operate the low carbon standard.

Consultation responses needed soon

Each new policy comes with a consultation paper – each of which raises complex and inter-related questions. Resolving all of these questions will be crucial for all developers of low carbon hydrogen production, which will be one reason why all the consultations have a closing date of 25^th October.

Conclusion

In this blog I have only covered three of the policies – but these alone represent the greatest shift in UK energy policy to support low carbon hydrogen. While we may not have a Hydrogen Economy, we are certainly going to have an economy with significant levels of Low Carbon Hydrogen from the mid-2020s. BEIS cite that these new policies could drive 20% to 35% of UK energy demand for low carbon hydrogen by 2050.

We are seeing rapidly growing demand from our clients, even in advance of this publication, across the energy production, automotive, marine, and aviation sectors. It is already clear that the “Fuel of the Future” is quickly becoming a significant part of the decarbonisation solution in the present.

Ricardo has an extensive range of skills and experience relating to the hydrogen agenda, from policy development to infrastructure feasibility, through to implementation and integration of hydrogen-based technologies for global transport applications.

For hydrogen focused case studies, reports and news announcements visit the Ricardo Hydrogen pages.